GAO HighRisk Program: Highlighting the Need for Improved Program Integrity

1
United States Government Accountability Office
2005 White House Conference on Aging
The Honorable David M. Walker Comptroller General
of the United States December 12, 2005
2
Composition of Federal Spending
1964
1984
2004
Social Security
Medicare Medicaid
Defense
All other spending
Net interest
Source Office of Management and Budget.
3
Federal Spending for Mandatoryand Discretionary
Programs
Discretionary
Mandatory
Net Interest
Source Office of Management and Budget.
4
Surplus or Deficit as a Share of GDP Fiscal
Years 1962-2005
Percent of GDP
Source Office of Management and Budget and
Congressional Budget Office.
5
Fiscal Year 2004 and 2005 Deficits
Includes 151 billion in fiscal year 2004 and
173 billion in fiscal year 2005 in Social
Security surpluses and 4 billion in fiscal year
2004 and 2 billion in fiscal year 2005 in Postal
Service surpluses.
6
Estimated Fiscal Exposures(in trillions)
Sources Consolidated Financial
Statements. Note Estimates for Social Security
and Medicare are PV as of January 1 of each year
as reported in the Consolidated Financial
Statements and all other data are as of September
30. The 2005 Trustees Reports issued in March of
this year show that the Social Security and
Medicare exposures have increased as follows
Social Security increased to 5.7 trillion,
Medicare Part A increased to 8.8 trillion,
Medicare Part B increased to 12.4 trillion and
Part D increased to 8.7 trillion. Totals may not
add due to rounding.
7
How Big is OurGrowing Fiscal Burden?
Our total fiscal burden can be translated and
compared as follows
Note Net worth and income data are calendar
year 2004 levels. Sources Federal Reserve
Board for household net worth Census Bureau for
median household income and the Bureau of
Economic Analysis for disposable personal income
per capita.
8
Health Care Is the Nations Top Tax Expenditure
in Fiscal Year 2004(estimated)
Dollars in billions

Note Tax expenditures refers to the special
tax provisions that are contained in the federal
income taxes on individuals and corporations. OMB
does not include forgone revenue from other
federal taxes such as Social Security and
Medicare payroll taxes. If the payroll tax
exclusion were also counted here, the total tax
expenditure for employer contributions for health
insurance premiums would be about 50 percent
higher or 153.5 billion. Source Office of
Management and Budget (OMB), Analytical
Perspectives, Budget of the United States
Government, Fiscal Year 2006.
9
Composition of Spending as a Share of GDPUnder
Baseline Extended
Percent of GDP
Revenue
Medicare Medicaid
Net Interest
Social Security
All other spending
Notes In addition to the expiration of tax
cuts, revenue as a share of GDP increases through
2015 due to (1) real bracket creep, (2) more
taxpayers becoming subject to the AMT, and (3)
increased revenue from tax-deferred retirement
accounts. After 2015, revenue as a share of GDP
is held constant. Source GAOs August 2005
analysis.
10
Composition of Spending as a Share of
GDPAssuming Discretionary Spending Grows with
GDP after 2005 and All Expiring Tax Provisions
are Extended
Percent of GDP
Revenue
Medicare Medicaid
Net Interest
Social Security
All other spending
Notes Although expiring tax provisions are
extended, revenue as a share of GDP increases
through 2015 due to (1) real bracket creep, (2)
more taxpayers becoming subject to the AMT, and
(3) increased revenue from tax-deferred
retirement accounts. After 2015, revenue as a
share of GDP is held constant. Source GAOs
August 2005 analysis.
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Current Fiscal Policy Is Unsustainable

• The Status Quo is Not an Option
• We face large and growing structural deficits
  largely due to known demographic trends and
  rising health care costs.
• GAOs simulations show that balancing the budget
  in 2040 could require actions as large as
• Cutting total federal spending by 60 percent or
• Raising taxes to 2.5 times today's level
• Faster Economic Growth Can Help, but It Cannot
  Solve the Problem
• Closing the current long-term fiscal gap based on
  responsible assumptions would require real
  average annual economic growth in the double
  digit range every year for the next 75 years.
• During the 1990s, the economy grew at an average
  3.2 percent per year.
• As a result, we cannot simply grow our way out of
  this problem. Tough choices will be required.
• The Sooner We Get Started, the Better
• Less change would be needed, and there would be
  more time to make adjustments.
• The miracle of compounding would work with us
  rather than against us.
• Our demographic changes will serve to make reform
  more difficult over time.
• The Public Needs to Be Informed and Involved

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The Way Forward Three Pronged Approach

• Impose Budget Controls and Enhance Legislative
  Process
• Discretionary spending caps
• PAYGO rules on both sides of the ledger
• Mandatory spending triggers
• Automatic present value disclosures for
  legislative debate on major tax and spending
  bills
• Provide enhanced and integrated summaries of
  every key bill to Members before they vote on it,
  especially in connection with proposed new
  programs, policies, or activities
• Improve Accounting and Reporting and Metrics
• Enhanced financial statement presentation (e.g.
  trust fund activity, intergenerational burdens)
• Develop key national (outcome-based) indicators
• Re-examine Policies and Programs
• Restructure existing entitlement programs
• Reexamine the base of discretionary and other
  spending
• Review and revise existing tax policy, including
  tax preferences and enforcement programs

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21st Century Challenges Report

• Provides background, framework, and questions to
  assist in reexamining the base
• Covers entitlements other mandatory spending,
  discretionary spending, and tax policies and
  programs
• Based on GAOs work for the Congress
• Issued February 16, 2005

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Illustrative 21st Century QuestionsRetirement
and Disability Policy

• How should Social Security be reformed to provide
  for long-term program solvency and sustainability
  while also ensuring adequate benefits (for
  example, increase the retirement age, restructure
  benefits, increase taxes, and/or create
  individual accounts)?
• What changes should be made to enhance the
  retirement income security of workers while
  protecting the fiscal integrity of the PBGC
  insurance program (for example, increasing
  transparency in connection with underfunded
  plans, modifying PBGCs premium structure and
  insurance guarantees, reforming plan funding
  rules, or restricting benefit increases and the
  distribution of lump sum benefits in connection
  with certain underfunded plans)?
• How can existing policies be reformed to
  encourage income preservation strategies so that
  retirement income lasts an individuals entire
  life (for example, benefit annuitization)?
• How can existing policies and programs be
  reformed to encourage older workers to work
  longer and to facilitate phased retirement
  approaches to employment (for example, more
  flexible work schedules or receiving partial
  pensions while continuing to work)?

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Illustrative 21st Century QuestionsHealth Care

• How can we make our current Medicare and Medicaid
  programs sustainable? For example, should the
  eligibility requirements (e.g., age, income
  requirements) for these programs be modified?
• How can we perform a systematic reexamination of
  our current health care system? For example,
  could public and private entities work jointly to
  establish formal reexamination processes that
  would (1) define and update as needed a minimum
  core of essential health care services, (2)
  ensure that all Americans have access to the
  defined minimum core services, (3) allocate
  responsibility for financing these services among
  such entities as government, employers, and
  individuals, and (4) provide the opportunity for
  individuals to obtain additional services at
  their discretion and cost?

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Key Elements for Economic Security in Retirement

• Adequate retirement income
• Social Security
• Pensions
• Savings
• Earnings from continued employment (e.g.,
  part-time)
• Affordable health care
• Medicare
• Retiree health care
• Long-term care (a hybrid)
• Major Players
• Employers
• Government
• Individuals
• Family
• Community

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Social Security and Medicares HospitalInsurance
Trust Funds Face Cash Deficits
Billions of 2005 dollars
Social Securitycash deficit 2017
Medicare HIcash deficit2004
Note Projections based on the intermediate
assumptions of the 2005 Trustees
Reports. Source GAO analysis based on data from
the Office of the Chief Actuary, Social Security
Administration and Office of the Actuary, Centers
for Medicare and Medicaid Services.
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Social Security, Medicare, and Medicaid Spending
as a Percent of GDP
Percent of GDP
Medicare
Medicaid
Social Security
Note Social Security and Medicare projections
based on the intermediate assumptions of the 2005
Trustees Reports. Medicaid projections based on
CBOs January 2005 short-term Medicaid estimates
and CBOs December 2003 long-term Medicaid
projections under mid-range assumptions. Source
GAO analysis based on data from the Office of the
Chief Actuary, Social Security Administration,
Office of the Actuary, Centers for Medicare and
Medicaid Services, and the Congressional Budget
Office.
19
U.S. Elderly Dependency Ratio Expected to
Continue to Increase

Elderly Dependency Ratio (in percent)
Source Population Division of the Department of
Economic and Social Affairs of the United Nations
Secretariat, World Population Prospects The 2004
Revision and World Urbanization Prospects The
2003 Revision. Note Data for 2005 through 2050
are projected.
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Key Dates Highlight Long Term Challenges of the
Social Security System
Sources Social Security Administration, The 2005
Annual Report of the Board of Trustees of the
Federal Old-Age and Survivors Insurance and
Disability Insurance Trust Funds. Washington, DC,
March 2005. Congressional Budget Office, The
Outlook for Social Security Potential Range of
Social Security Outlays and Revenues Under
Current Law. Washington, DC, June 2004 (updated
April 2005).
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GAO Criteria for Evaluating Social Security
Reform Proposals

• Reform proposals should be evaluated as packages
  that strike a balance among individual reform
  elements and important interactive effects.
• Comprehensive proposals can be evaluated against
  three basic criteria
• Financing sustainable solvency
• Balancing adequacy and equity in the benefits
  structure
• Implementing and administering reforms

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Challenges Facing the DefinedBenefit (DB)
Pension System

• Large accumulated deficits for many active plans,
  the PBGC, and the U.S. Government
• Structural weaknesses in certain industries with
  large, underfunded DB plans
• PBGC has limited control over its risks
• Decline in the number of DB plans
• Changing demographics and workforce trends
• Legal and regulatory uncertainties
• Social Security reform initiatives

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Broad Goals for Reformof the DB System

• Provide incentives and safeguards for plan
  sponsors to improve plan funding
• Hold plan sponsors accountable for adequately
  funding their plans
• Improve transparency and timeliness of plan
  financial information

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Several Reforms Might ImprovePlan Funding and
Reduce the Risks to PBGCs Long-term Viability

• Strengthen funding rules applicable to poorly
  funded plans
• Consider additional tax deductible funding
  flexibility
• Limit lump sums in underfunded plans
• Modify program guarantees (e.g., phase-in rules)
• Raise and modify pension premiums (e.g., nature
  of risk related premiums)
• Eliminate floor/offset arrangements with
  significant investment concentrations in employer
  securities
• Increase transparency of current plan funding
  information
• Modify bankruptcy laws
• Address issues surrounding certain hybrid plans
  (e.g., cash balance plans)

25
Key Dates Highlight Long Term Challenges of the
Medicare Program
Source 2005 Annual Report of The Boards of
Trustees of The Federal Hospital Insurance and
Federal Supplementary Medical Insurance Trust
Funds Washington, DC, March 2005
26
SMI Premium as Share of Average Social Security
(OASI) Benefit
Percent of average OASI benefit
Note Data for 2006 are based on the announced
SMI monthly premium of 88.50 and do not include
the Medicare Prescription Drug premium. In
August, the Centers for Medicare Medicaid
Services estimated that the national average
monthly premium for prescription drug coverage
equivalent to the Medicare standard coverage
would be 32.20. Source CMS, Office of the
Actuary.
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Issues to Consider in Examining Cost, Access, and
Quality Challenges

• In reforming our health care system, the public
  needs to be educated about the differences
  between wants, needs, affordability, and
  sustainability at both the individual and
  aggregate level.
• Ideally, health care reform proposals will
• align incentives for providers and consumers to
  make prudent choices about health insurance
  coverage and prudent decisions about the use of
  medical services,
• foster transparency with respect to the value and
  costs of care, and
• ensure accountability from health plans and
  providers to meet standards for appropriate use
  and quality.

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Selected Potential Health CareReform Approaches

• Provide more transparency in connection with
  health care costs and outcomes.
• Employ case management approaches for people with
  expensive acute and chronic conditions to improve
  the quality and efficiency of care delivered and
  avoid inappropriate care.
• Leverage the governments purchasing authority to
  foster value-based purchasing for health care
  products and services.
• Foster the use of information technology to
  increase consistency, transparency, and
  accountability in health care. Use the Federal
  Employees Health Benefits Program (FEHBP) as a
  possible means to experiment and see the way
  forward.
• Develop a set of national practice standards to
  help avoid unnecessary care, improve outcomes,
  and reduce litigation.

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Selected Potential Health Care Reform Approaches

• Revise certain federal tax preferences for health
  care to encourage the efficient use of
  appropriate care.
• Limit spending growth for government-sponsored
  health care programs (e.g., percentage of the
  budget and/or the economy).
• Pursue multinational approaches to investing in
  health care RD.
• Develop a core set of basic and essential
  services with supplemental coverage being
  available as an option but at a cost.
• Create insurance pools for alternative levels of
  coverage, as necessary.
• Provide additional cost sharing mechanisms for
  individuals.

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U.S. Labor Force Growth Will Continue to Decline
Percentage change (5-yr moving average)
Note Percentage change is calculated as a
centered 5-yr moving average of projections based
on the intermediate assumptions of the 2005
Trustees Reports. Source GAO analysis of data
from the Office of the Chief Actuary, Social
Security Administration.
31
Working Longer May Help Address the Challenges
of an Aging Population

• Impact on the Economy
• - Larger labor force
• - Additional economic growth
• Impact on the Federal Budget
• - Additional tax revenue
• - Reduced expenditures Social Security
  Medicare
• Impact on Individuals
• - Enhanced retirement security and quality of life

32
Why Older Americans Dont Work Longer

• Cultural Expectation to Retire in Mid-60s
• Social Security early retirement age is 62
• Many private pensions have similar or lower
  eligibility ages
• Older Americans Perceive Few Opportunities
• Few older workers felt they had opportunities for
  partial retirement
• Most older workers and retirees saw low wage, low
  skilled jobs as their primary employment
  opportunities
• Most Employers Do Not Make a Special Effort to
  Hire and Retain Older Workers
• Many employers say they are willing to implement
  policies to recruit and retain older workers, but
  few have actually done so
• Employers cite barriers, such as federal pension
  regulations, to flexible employment options for
  older workers

33
Everyone Needs to Planfor the Aging of the
Workforce

• Increase public awareness? both employers and
  employees need to understand the problem
• Encourage employers and employees to take an
  active role in meeting the challenges of an aging
  population
• Remove barriers and create opportunities for
  continued employment, such as phased retirement

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Three Key Ingredients Needed for These
Challenging and Changing Times

• Courage
• Integrity
• Innovation

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United States Government Accountability Office
2005 White House Conference on Aging
The Honorable David M. Walker Comptroller General
of the United States December 12, 2005